Barnes v Addy (1874) outlined what may constitute third-party liability concerning breach of trust or fiduciary duties: ’Knowing receipt’ and ‘knowing assistance’.
Henry Barnes appointed William Crush, John Lugar and John Addy to be testators and executors of his Will with a sum of money to be invested as the basis of an annuity for his widow, three daughters and son.
John Addy, as the sole remaining trustee, appointed a sole trustee to half the trust (with an indemnity) against the advice of his solicitor, William Duffield. However, Duffield drew up the deeds of appointment and indemnity and introduced Addy to a stockbroker who transferred money to the trustee.
The trustee mismanaged the trust property and became bankrupt. Barnes children sued Addy and Duffield; the Court held that the third parties could be liable for a breach of trust in two circumstances, known as the two ‘limbs’ of Barnes v Addy: knowing receipt and knowing assistance
To prove ‘knowing receipt’, the principal must establish the recipient knew that the property they received was a transfer of trust property in breach of the trustee’s duties.
To prove ’knowing assistance’ there must be a breach of trust or fiduciary duty by a third party who knowingly assists in the breach.
In a recent decision, the High Court of Australia insisted on strictly applying Barnes v Addy and holding that the breach must be dishonest and fraudulent.
Where the two limbs in Barnes v Addy are established, a third party will be held to be a constructive trustee with the party bringing the claim against them having the same remedies as they would have against a constructive trustee.
The court accepted that Duffield, never knew nor suspected any dishonest purpose, or believed that any actual fraud would result from what was done; it was therefore unable to hold him responsible.